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 SEC sets modalities for tax on shares' premium value

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Join date : 2010-05-30

PostSubject: SEC sets modalities for tax on shares' premium value   Sat Jul 03, 2010 2:08 am


Sarwar A Chowdhury

The stockmarket regulator has set modalities for companies, which will float or sell new shares with additional value, to pay taxes imposed on the premium value of shares.

The 3 percent taxes were proposed for the first time in the national budget for fiscal 2010-11.

As per the modalities that were set at a meeting yesterday, the companies will have to pay taxes on the premium value of shares to the National Board of Revenue, prior to the IPO lottery or distribution of shares, officials said.

Both in the cases of fixed price or book building method, the companies will pay the taxes through bank 'chalan' (bill), after the closure of IPO subscription and before the IPO lottery.

The chalans will have to be submitted to the Securities and Exchange Commission to get IPO lottery consent.

In the case of rights issue, the companies will have to pay the taxes to NBR through bank chalans after the issuance of rights shares, and the chalans will have to be submitted to SEC.

On receipt of the chalans, the SEC will give clearance to CDBL to credit the rights shares to the respective shareholders' BO account.

The SEC set the principles on tax payment by companies after discussing the matter with the two bourses.

Stressing the need for adopting certain methods for payment, an SEC high official said it is the commission's responsibility to prepare the guidelines because the taxes are new.

“We sat with the bourses and set the modalities, as the premium value is determined by both the regulator and the exchanges."

In the fixed price method, SEC certifies a premium value. Under the book building method, the premium value is related with the stock exchanges.

The provision for taxes on premium share value however drew criticism from different quarters like market experts, listed companies, stockbrokers and chamber leaders.

They pointed out that such a provision is contrary to the basic principles of taxation, as the tax on the premium value of shares basically amounts to taxing the equity of a company, which goes against taxation principles.

The shares with premium value or without premium value are related to a company's paid-up capital. The money raised by floating shares is not a company's income or profit, so it is not shown in the balance sheet, they explained.

They also urged the government to withdraw such tax, saying it would discourage privately owned companies from coming to the market. But the government was unmoved.
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